· Crypto markets melting down due to Federal Reserve policy
· “Risk off” needs to end before crypto gets momentum back
· First half of year likely a “season of accumulation.”
At the time of writing, crypto markets are melting down. This should not be a huge surprise considering that as institutional adoption of the markets continues to grow, crypto markets will begin to act very much like other assets. For example, Bitcoin has recently had a roughly 86% correlation with the S&P 500. Ironically, this is exactly what crypto was not supposed to be.
While there is increased regulation in the crypto world globally, it is still very much the “Wild West” when it comes to technology, and certainly as an asset. When you trade crypto, you need to think of it very much like the technology stocks in the 1990s, not all will survive every time there is a bear market, but at the end of the tunnel there will be winners to come out on top, looking quite strong and perhaps becoming everyday lexicon for the general public. It is this reason that you as a trader should learn to trade Bitcoin as it has been such a winner for so many years. This is especially true now that it has pulled back.
Bitcoin still drives all other coins
No matter how you look at it, in order for crypto to turn around, Bitcoin will have to do well. Even if you are not a trader of Bitcoin itself, you need to have an idea of what is going on in that market. Currently, the Federal Reserve is in the process of tightening monetary policy. This has a decidedly “risk off” attitude for markets, and extremely volatile markets like crypto certainly will be the first things dumped. For example, Ethereum has had an even worse selloff than Bitcoin, which is quite impressive considering that to start the year, Bitcoin has lost 50% from its all-time highs by the end of January.
If Bitcoin can stabilize and turnaround, it is very likely that will have a bit of a “knock on effect” on the other coins such as Ethereum, Solana, etc. However, to think that the market is simply going to turn around and spike to the upside is a bit of wishful thinking, as selloff like this desperately needs some type of stability in order to attract more money. This is where Bitcoin is more than likely going to go this year, and then by extension the rest of the market: sideways for some time before buyers step back in.
Pay attention to the Jerome Powell
For retail traders, they will need to keep a close eye on what the Chairman of the Federal Reserve says. There are a couple of important Federal Reserve meetings over the next few months, which will give the markets an idea as to what the central bank is going to do. As things stand right now, most expect the Federal Reserve to hike interest rates at least four times, thereby slowing down the economy. This is done to fight inflation, which ironically has been one of the biggest drivers of crypto. If inflation starts to drop, returns in the crypto market will be sluggish, but as the central bank starts to step away from tightening monetary policy, that is the clue as to when crypto will take off again.
With inflation already starting to cool off a bit, Jerome Powell may find himself stuck between a rock and a hard place. Quite frankly, he has a choice of wrecking the stock market to fight inflation via interest rate hikes, or let inflation run its course and save Wall Street. More likely than not, due to the rate of change of inflation, is very likely the Federal Reserve will never get to four full rate hikes. When the capitulate, it’s a tailwind for crypto.
Most of the year will be about accumulation
The only way to trade a market like this successfully is to let things calm down and “dip your toe into the water.” For example, when Ethereum dropped all the way down to $400, the smart money was accumulating. It is very likely you get that type of chance again this year, as markets drop. However, there is much more adoption of these coins this time around, so I would not anticipate prices dropping the way they did a few years ago. We are currently trying to find the bottom, and we eventually will.
The smart strategy is to wait for the markets to stabilize, start accumulating the major coins such as Bitcoin and Ethereum, and once they start to move start adding to your position. It is very likely that the first couple of months, perhaps even as late as June or July we will see somewhat sideways and sluggish action throughout the crypto world. Smart money starts to accumulate in that situation. Later in the year, the Federal Reserve will probably have to give up on its tightening cycle, which should send crypto soaring. While reaching the $60,000 region in Bitcoin by the end of the year seems a bit of a stretch, it certainly should recover quite nicely and have a strong move higher once the dust settles to at least attempt it.